Question

State the types of income elasticity of demand.

Explain various degrees of income elasticity of demand.

Explain Negative Income elasticity of demand.

Answer 1

1. Positive Income Elasticity: Income elasticity of demand for a good is said to be positive when with an increase in income of the consumer, the amount purchased of the good increases, and with a decrease in the income of the consumer, the amount purchased of the good decreases. For most of the commodities, income elasticity of demand is positive because an increase in income leads to an increase in quantity demanded of the commodity. Goods with positive income elasticities are called 'normal' goods. For normal commodities, we can classify income elasticity of demand into three categories.
   1. Income elastic: If the percentage change in quantity demanded of a commodity is greater than the percentage change in income, the elasticity will exceed unity. The demand for the commodity is said to be income elastic in this case. Generally, the commodities of luxuries like cars, colour TVs and jewellery have high income elasticity of demand.
   2. Income inelastic: If the percentage change in quantity demanded of a commodity is smaller than the percentage change in income, the elasticity will be less than unity. In this case, the demand for the commodity is said to be income inelastic. Necessities like food, soap and clothes have low income elasticity of demand.
   3. Unitary income elasticity: If the percentage change in quantity demanded of a commodity is equal to percentage change in income, the elasticity will be equal to unity. In this case, the commodity has a unitary income elasticity. Income elasticity of unitary represents a dividing line between income elastic and income inelastic demand.
2. Negative Income Elasticity of Demand: Income elasticity of demand for a commodity is said to be negative when an increase in the income of the consumers leads to a fall in the amount purchased of a commodity, and vice versa. It can be written as E_y < 0. In the case of inferior commodities, an increase in income leads to a fall in the quantity demanded of the commodity, i.e., less is demanded at higher incomes and more is bought at lower incomes. Income elasticity of demand in such cases is negative. For example, the income elasticity of inferior (coarse) food grains like maize and bajra is negative. When income increases, consumers will switch over from inferior food grains to superior grains like rice and wheat, leading to a fall in the demand for inferior food grains.
3. Zero Income Elasticity of Demand: Income elasticity of demand for a good may be zero in some exceptional cases. Zero income elasticity of demand for a good implies that a change in income leaves quantity demanded unchanged. For instance, income elasticity of demand for salt may be zero because an increase in income beyond a certain level may not bring about any change in the demand for salt.